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Borrowers Guide to
Construction Loans
Introduction
The Borrowers Guide to Construction Loans has been
designed to assist consumers gain a better understanding of
how the construction lending process works. The process
can be confusing and overwhelming at times, but when you
understand the basic process, you’ll be much more
prepared. The purpose of this guide is to assist you through
each step. We believe the collection of the enclosed
information will make your journey into the construction
world an enjoyable one!
So, let’s get started…
Before you start looking for land and a property to build there
are several key details to consider such as:
How much can I borrow?
Understanding the costs involved
How much deposit do I require?
Can I afford it?
How much can I borrow?
How much you can borrow will depend on several factors
including:
Your income
What deposit is required
Eligibility for Home Owner Grant
Other loan repayments and commitments
An important factor to consider is how comfortable you are
financially to repay the proposed loan. It is imperative that you
do not over stretch yourself, it is best if you sit down and work
out a budget and understand how much you have left over to
repay a loan comfortably. You should also factor in interest rate
movements as this will affect your repayment amount.
Page 3
Preparation Before you start looking for land
Some of the other costs would include: Stamp Duty
This is a government cost that is usually the biggest expense outside the purchase price of the
property. Stamp duty varies between the states and territory. For guidance on the approximate
stamp duty cost would be in your relevant state, go to www. stampdutycalculator.com.au
Loan Setup Costs
This includes establishment fees and will vary pending on the lender and the loan product chosen. It
is important to note that you may also require Lender’s Mortgage Insurance (LMI) depending on
your deposit size.
Conveyancing Costs
Conveyancing is the process of which a property’s ownership is transferred from the current
owner (the vendor) to the buyer. A conveyancer is a legal representative that specialises in this
field. Either a conveyancer or a solicitor will review your Contract of Sale and ensure
appropriate checks are conducted on the property with local government agencies.
Getting a Deposit Together
There are many options available in relation to how much you will need to come up with as a deposit.
Depending on your situation it could vary from 5% to 20% or more. Sitting down with your trusted
mortgage professional will ensure you know which options are available to you.
Understanding the Costs
The Mortgage Steps Understanding the mortgage process
The Mortgage Steps.
There are 10 steps to the Mortgage Process.
These are:
Step 1: Interview
Step 2: Completion of a Loan Application
Step 3: Lender Assessing Application
Step 4: Obtaining a Decision - Conditional
Approval
Step 5: Valuation of Security being provided
Step 6: Lenders Mortgage Insurance
Step 7: Formal Approval
Step 8: Mortgage Documentation
Step 9: Insurance Requirements
Step 10: Settlement
Step 1:
Interview
Step 2:
Completion of Loan
Application
Step 3:
Lender Assessing Application
Step 4:
Conditional Approval
Step 5:
Valuation of Security being
provided
Your mortgage professional will discuss the home loans
(with the necessary features and benefits that you require)
that best suit your situation. They will go through
numerous options that are available to see which is the
most appropriate that will suit your needs and wants.
Once you are happy with your selection of the loan
product, the loan process will commence.
Your Mortgage Professional will now complete the
lenders application that you have chosen and will go
through what is required in relation to all the necessary
documentation which is to be included so they can lodge
your home loan application. They will also go through
your income situation to see if you will be able to service
the loan that you are applying for. Upon receiving all the
relevant documentation the Mortgage Professional will
submit it to the chosen lender.
The lender will assess your application to determine
whether you meet their serviceability and credit
requirements. This process includes confirmation of
your income, employment, assessment of your
supporting documentation and a credit check.
The Mortgage Professional will receive a communication
from the lender in the form of a conditional approval on
your behalf. The lender will also outline any matters that
need to be addressed before they can issue an
unconditional approval.
The most common condition of an approval is valuation
of the security being provided. The lender will order the
valuation and the valuer would (typically) require the
land contract, plans, and specifications and building
contract of the house you are going to build. This could
take up to 3-4 days to complete.Page 6
The Mortgage Process
Step 6:
Lenders Mortgage Insurance
This step will only be necessary if
you have less than a 20% deposit
or insufficient equity in an existing
property.
Step 7:
Formal Approval
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is one of the most
popular ways to achieve the dream of home ownership
sooner for borrowers that do not have a large deposit.
Many lending institutions require borrowers to
contribute a 20% deposit before they will agree to
provide a loan. This is largely to protect against the risk
associated with providing the borrower with the loan in
the event that they default. By using LMI, lenders are
able to pass on this risk to a mortgage insurer, which in
turn enables them to offer the same loan amount but
with less of a deposit. LMI should not be mistaken for
Mortgage Protection Insurance, which covers your
mortgage in the event of death, sickness, unemployment
or disability.
LMI protects lenders against a loss should a borrower
default on their home loan. If the security property is
required to be sold as a result of the default, the net
proceeds of the sale may not always cover the full balance
outstanding on the loan. Should this be the case, the
lender is entitled to make an insurance claim to the
Mortgage Insurer for the reimbursement of any shortfall,
calculated in accordance with the terms of the insurance
policy. It is a once off premium and in a lot of cases can
be capitalised with the loan.
When a home loan application is formally approved
(unconditionally approved) it means that all conditions
and criteria required to assess a loan application have been
supplied, assessed and approved. It is only when a home
loan application is formally approved that the borrower
can feel comfortable that they can obtain a home loan.
The Mortgage Process
If you are buying a property it is advisable not to exchange
contracts until such time that your loan has been formally
approved. A formal Letter of Offer will then be issued by
the lender. Mortgage documents will be prepared and will
be sent directly to the applicant/s or the applicants’
solicitor if that was requested in the loan application.
Now that the forma l offer has been provided, mortgage
documentation is prepared by the lender. This includes
the letter of offer; mortgage documents; terms and
conditions of the loan you have chosen and any other
documentation that is pertinent to the lenders own
guidelines.
With the new liabilities that come with owning property,
it is important to consider or review your insurance
requirements to ensure you are appropriately covered.
There are four main types of insurance you should
consider:
Home Insurance
Contents Insurance
Life Insurance
Income Protection
You may need to start your insurance cover prior to
settlement.
After the mortgage documents are signed, witnessed and
sent back to the lender, then settlement is arranged via
your solicitor/conveyancer or if there is not a necessity for
a solicitor/conveyance then the Mortgage Professional
will be involved to ensure settlement is completed.
Page 8
The Mortgage Process
Step 8:
Mortgage Documentation
Step 10:
Settlement
Step 9:
Insurance Requirements
Construction Loans Drawdowns/Progress Payments
In a construction loan your builder is usually paid in
draw downs (sometimes also known as progress
payments) which occur when each part of the work is
completed.
This means that your monthly mortgage repayments
slowly increase as the construction moves forward until
finally, at completion of construction, the loan
repayment reaches its full monthly repayment amount.
Many lenders also offer interest only repayments
during the construction process which then reverts to
principle and interest repayments once the
construction is complete.
To qualify for a construction loan you will need to have
council approved plans and a fixed price tender from a
registered builder. You should also note that you will
need to use your saved funds or equity before drawing
down on your construction loan.
For many building contracts a progress inspection at
every mortgage loan drawdown is arranged by the
lender. Always check with your mortgage professional
if you would like to make any variations to your
building contract, prior to proceeding.
Upon completion of the dwelling, the construction loan
will revert to the loan product originally chosen by you.
What are drawdowns?
In a construction loan your
builder is usually paid in
drawdowns (sometimes known as
progress payments) which occur
as various stages of work are
completed.
Many construction loans have
approximately five drawdowns.
These drawdowns are often at the
following stages, but may vary
depending on your building
contract:
Slab complete
Frame completed
Outer brick work completed
Lock up stage
Workable completion
Builders usually will send you a
progress invoice each time a
progress payment is due. Your
lender may also require you to
sign a progress payment form
that they will provide and you
would need to send this form to
the lender along with the progress
invoice. Once the progress
payment is approved by the
lender, the builder will be paid
from your loan account.
Signed Contract (fully signed by the builder
and purchaser)
Signed Specifications (fully signed by
builder and purchaser)
Building Services Authority (BSA)
Insurance (QLD only)
Builders Public Liability Insurance
Arrange insurance covering the full
replacement value and ensure that your
lender is listed as mortgagee
Page 10
What is the maximum percentage you
can borrow?
There are some construction loans that may allow
you to borrow up to 95% of the value of the property
plus some funds to cover the cost of Lenders
Mortgage Insurance.
After your loan is approved what other items do you
need to provide prior to commencing construction?
Construction Loans
Builders License
Home Warranty Insurance (NSW/QLD) – also
known as Builders Warranty Insurance (VIC),
Building Indemnity Insurance (SA), Home
Indemnity Insurance (WA), Housing Indemnity
Insurance (TAS), Building Warranty Insurance (NT)
Employers Liability and Workers Compensation
Know your building contract
Finding a reputable builder is the first thing to do after
you’ve made the decision to build. Next, you will need to
enter into a building contract with a licensed builder. The
contract is a legally binding document. Ensure you read the
fine print!
Is it your responsibility to go through the terms and
conditions with your legal representative. Never sign
anything unless you are 100% certain you understand what
it means.
Ask the question of your builder – do you have all the
necessary insurance policies in place? Not all lenders will
need to sight the following documents, but some will. Either
way, it is strongly recommended that you obtain copies of
the following documents from your chosen builder:
REMEMBER: At the completion of your construction, you
will need to obtain an Occupation Certificate, also known as
an Occupation Permit, from your local council.
FIRST HOME OWNERS: Thankfully there are several
Government Incentives and benefits available to provide a
little helping hand. For more information visit
www.firsthome.gov.au
Tips Things to remember
Building Commission
www.buildingcommission.com.au
Master Builders Association
www.masterbuilders.com.au
Home Design Directory
www.homedesigndirectory.com.au
Builder Services Authority
www.bsa.qld.gov.au
Office of Fair Trading Home Building Service
www.fairtrading.nsw.gov.au
First Home Owner Grants
www.firsthome.gov.au
Useful Websites
Nearly half of Australian home buyers now use a mortgage
professional to find them the home loan that best suits them.
Mortgage Professionals have the expertise, the contacts and experience
to ensure you get the right loan for you.
Furthermore, we take on the legwork so you don’t have to.
Discuss your existing situation, your lending needs,
requirements, and obtain all necessary information pertaining to
your lending application.
Explain the types of loans available to you from a range of banks
and specialist lending institutions.
Based on the information provided by you and utilising specialist
lending software, match your lending requirements to a selection
of loan products offered by a diverse range of lenders.
Act as an intermediary between you and the lender by
completing and packaging your loan application.
Liaise with your solicitor; real estate agent; accountant and any
other related party to ensure a smooth and timely settlement.
Assist with any future lending requirements, whether you wish to
check, change or top-up your loan.
Need help? What a mortgage professional can do for you
Email:
Phone:
+61 2 6104 9059
0400 223 631
Website:
www.actonadvice.com.au
Ready to get started?